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Did Fiscal Consolidation Cause the Double Dip Recession in the Euro Area

Philipp Heimberger
- 01 Jul 2017 - 
- Vol. 5, Iss: 3, pp 439-458
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In this paper, the short run effects of fiscal consolidation measures on economic activity in the euro area during the euro crisis were analyzed and the link between cumulative GDP growth and fiscal austerity measures during 2011–2013 was presented.
Abstract: 
This paper analyses the short-run effects of fiscal consolidation measures on economic activity in the euro area during the euro crisis. It presents new econometric estimates on the link between cumulative GDP growth and fiscal austerity measures during 2011–2013. The main empirical finding is that the depth of the economic crisis in the euro area's economies is closely related to the harshness of fiscal austerity. Cumulative multiplier estimates are found to vary in a range from 1.4 to 2.1, depending on the data source used to identify the intensity of fiscal consolidation. Given these multiplier values, a reasonable approximation of the size of the output losses due to fiscal austerity in the euro area during 2011–2013 is in the range of 5.5 to 8.4 percent of GDP. Against the background of the prevailing macroeconomic and institutional circumstances, fiscal consolidation is argued to be the cause of the double-dip recession.

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OCTOBER 2016
W
orking Paper 130
Did Fiscal Consolidation Cause
the Double-Dip Recession in
the Euro Area?
Philipp Heimberger
The Vienna Institute for International Economic Studies
W
iener Institut für Internationale Wirtschaftsvergleiche
Did Fiscal Consolidation Cause the Double-Dip
Recession in the Euro Area?
PHILIPP HEIMBERGER
Philipp Heimberger is Research Economist at the Vienna Institute for International Economic
Studies (wiiw) and at the Institute for Comprehensive Analysis of the Economy, Johannes Kepler
University Linz.
The Institute for New Economic Thinking supported this work under Grant INO1500015.
Abstract
This paper analyses the short-run effects of fiscal consolidation measures on economic activity in the
euro area during the euro crisis. It presents new econometric estimates on the link between cumulative
GDP growth and fiscal austerity measures during 2011-2013. The main empirical finding is that the
depth of the economic crisis in the euro area's economies is closely related to the harshness of fiscal
austerity. Cumulative multiplier estimates are found to vary in a range from 1.4 to 2.1, depending on the
data source used to identify the intensity of fiscal consolidation. Given these multiplier values, a
reasonable approximation of the size of the output losses due to fiscal austerity in the euro area during
2011-2013 is in the range of 5.5% to 8.4% of GDP. Against the background of the prevailing
macroeconomic and institutional circumstances, fiscal consolidation is argued to be the cause of the
double-dip recession.
Keywords: fiscal policy, fiscal multiplier, fiscal consolidation, austerity, growth, eurozone
JEL classification: E61, E62, E63
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This paper analyses the short-run effects of fiscal consolidation measures on economic activity in the euro area during the euro crisis.